PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 10, Problem 14PS
Break-even analysis A financial analyst has computed both accounting and
- a. Would the accounting break-even level of sales in the first years of the project increase or decrease?
- b. Would the NPV break-even level of sales in the first years of the project increase or decrease?
- a. If you were advising the analyst, would the answer to part (a) or (b) be important to you? Specifically, would you say that the switch to immediate expensing makes the project more or less attractive?
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Assuming monetary benefits of a construction project at $50,000 per year, one-time costs (initial investment) of $15,000, recurring costs of $35,000 per year, a discount rate of 10 per cent, and a 4-year time horizon, calculate the net present value (NPV) of an information system's costs and benefits. Calculate the overall return on investment (ROI) of the project. During which year does break-even occur?
Use the NPV template provided (modify to suit your answer) and clearly display the NPV, ROI, and year in which payback occurs.
Write a paragraph explaining whether you would recommend investing in this project based on your financial analysis. Explain your answer referring to the NPV, ROI and payback for this project.
Discount Rate (10%)
Year 0 - 1.0000
Year 1 - .9091
Year 2 - .8264
Year 3 - .7513
Year 4 - .6830
NPV and maximum return A firm can purchase new equipment for a $22,000 initial investment. The equipment generates an annual after-tax cash inflow of $6,000
for 6 years.
a. Determine the net present value (NPV) of the asset, assuming that the firm has a cost of capital of 9%. Is the project acceptable?
b. Determine the maximum required rate of return that the firm can have and still accept the asset.
a. The net present value (NPV) of the new equipment is $
(Round to the nearest cent.)
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Based on the image , Calculate the ARR for XYZ Corporation. Assume depreciation is calculated on the straight-linemethod and that the project has a scrap value of R5000.
Chapter 10 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 10 - Terminology Match each of the following terms to...Ch. 10 - Project analysis True or false? a. Sensitivity...Ch. 10 - Sensitivity analysis Otobais staff (see Section...Ch. 10 - Prob. 4PSCh. 10 - Prob. 7PSCh. 10 - Scenario analysis What is the NPV of the electric...Ch. 10 - Prob. 9PSCh. 10 - Break-even analysis Break-even calculations are...Ch. 10 - Prob. 11PSCh. 10 - Prob. 12PS
Ch. 10 - Prob. 13PSCh. 10 - Break-even analysis A financial analyst has...Ch. 10 - Fixed and variable costs In a slow year, Deutsche...Ch. 10 - Operating leverage You estimate that your cattle...Ch. 10 - Prob. 17PSCh. 10 - Prob. 20PSCh. 10 - Real options Explain why options to expand or...Ch. 10 - Prob. 22PSCh. 10 - Real options True or false? a. Decision trees can...Ch. 10 - Prob. 24PSCh. 10 - Real options An auto plant that costs 100 million...Ch. 10 - Decision trees Look back at the Vegetron electric...Ch. 10 - Prob. 27PSCh. 10 - Prob. 28PSCh. 10 - Prob. 29PSCh. 10 - Prob. 32PS
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- A firm wants to invest in a project whose financial information is below. The tax rate is 30%, and the MARR (Minimum Attractive Rate of Return) is 16%. Answer the following questions based on the information given in the table. Initial investment cost (TL) 155,000 Operating expenses (TL/year) 42,000 General maintenance cost (TL) (end of 3rd year) 26,500 Income (TL/year) 65,000 Salvage value (TL) 41,000 Economic life (year) 5 Taking into account the net cash flows of the project after tax; a) Calculate the annual depreciation amount required by the company for the project using the straight-line (SL) depreciation method. b) What is the project's net cash flow amount in the initial period? c) What is the project’s net cash flow amount in the operating periods? d) What is the project's net cash flow amount in the last period? e) Calculate the Net Present Value of the project and evaluate it from an economic point of view.arrow_forwardExplain how did it get the NPV, the Economic Value Added (EVA), and the Market Value Added (MVA)arrow_forwardExplain how did it get the value of depreciation, income taxation, NOPAT, and after-tax cash flow in the table.arrow_forward
- You are analyzing a project and have developed the following estimates. The depreciation is $47,900 a year and the tax rate is 21 percent. What is the worst-case operating cash flow? Unit sales Sales price per unit Variable cost per unit Fixed costs -$2,545 $11,145 $88,855 $27,556 O $63,937 Base-Case Lower Bound Upper Bound 9,800 12,800 $34 $24 $ 9,200 11,300 $ 39 $25 $ 9,700 $44 $26 $ 10,200arrow_forwardWhat is the NPV of project D? Assume that the firm requires a minimum after-tax return of 8% on investment. Project D costs $5,000 and will generate sales of $4,000 each year for 5 years. The cash expenditures will be $1,500 per year. The firm uses straight-line depreciation with an estimated salvage value of $500 and has a tax rate of 25%. (2) What is the book rate of return based on the average book value? (Round your answer to 2 decimal places.)arrow_forwardNPV and IRR Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is $41,150, and the project is expected to yield after-tax cash inflows of $9,000 per year for 7 years. The firm has a cost of capital of 8%. a. Determine the net present value (NPV) for the project. b. Determine the internal rate of return (IRR) for the project. c. Would you recommend that the firm accept or reject the project? a. The NPV of the project is $. (Round to the nearest cent.) Text dia Librai I Calculat Resource Enter vour answer in the answer box and then click Check Answer. Check Answer ic Study es Clear parts remaining nunication Tools > O Type here to search insert ( to |立arrow_forward
- NPV and IRR Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is $31,850, and the project is expected to yield after-tax cash inflows of $7,000 per year for 7 years. The firm has a cost of capital of 9%. a. Determine the net present value (NPV) for the project. b. Determine the internal rate of return (IRR) for the project. c. Would you recommend that the firm accept or reject the project? a. The NPV of the project is $. (Round to the nearest cent.) Carrow_forwardWhy straight-line depreciation method is used instead of the sinking fund depreciation method?arrow_forwardBaghibenarrow_forward
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